Heavy Lifting - thoughts and web finds by an economist
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Wednesday, May 26, 2004
The AARP releases their Watchdog Report claiming that drug prices are rising too fast. The claim is that drug prices rose three times the rate of inflation last year and that this is a bad thing. The majority of consumers are unhappy about rising prices, regardless of whether it is medication, gasoline, or the afternoon matinee. However, the AARP report, and subsequent press stories, such as this one from the Ft. Worth Star-Telegram, confuse macroeconomics with microeconomics. As much as we would like to easily shift between the two, it isn't really that easy.
For instance, the rate of inflation is simply a composite average of how prices are changing across most major metropolitan areas and these metro areas are then used to create a national average. This general trend in prices has very little connection to the price of a particular good. Moreover, many products that have relatively volatile prices, such as gasoline and heating oil, are not normally included in the calculation of inflation. Therefore, the rate of inflation is an intertemporal comparison of prices but suffers from numerous problems, which economists have been pointing out for a number of years.
For the layman, it is enough to view the rate of inflation as an average. Because the rate is an average, there are some products that have seen greater than average increases in inflation just as there have been other goods that have experienced price increases less than the rate of inflation, or (gasp!) actual decreases in prices in the same time period. It is not surprising that drug prices are increasing in the short run: there is an increasing demand for prescription drugs, the income of the population demanding these drugs is (on average) relatively high, and the value of the drugs (in terms of the miracles they perform) are worth more today than ever.
On the other hand, the prices of buggy whips and manual typewriters have not kept pace with inflation. Nor has the price of Derek Lilliquist baseball cards and those really cute Ty Beanie Babies.
What would we think if we saw the following (hacked from the Star-Telegram article):
The price of the IBM Selectric Typewriter failed to meet the rate of overall inflation last year, and in many places the prices of the machines fell by more than 20%, two groups pressing for higher prices said in studies Tuesday.
Both "stories" are equally ridiculous. The Star-Telegram story could have just said "Consumers want lower prices," whereas my version of the story could have just said "Producers and sellers want higher prices." We could have a lot less ink and more advertising in the newspaper if we could write stories like this. The AARP "report" is a classic non-story story, and is indicative of how "news" is generated by those with policy agendas - in this case to force the Federal government (read, you and I) to pay for someone else's prescription drugs.
Great. When can I get the government to force someone in Seattle to help me pay for a new interior and rag top for my Mercedes?
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